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Tax Day comes around just once a year but staying on top of taxes can feel like a year-round job. Whether you file on your own or use a tax professional, you need to know what your filing obligations might be and how your choices can affect your bottom line when it comes to money.
Tax breaks and credits. Tax credits are dollar for dollar reductions in your tax due and are usually more beneficial than tax deductions which simply reduce your taxable income. Additionally, sometimes, as with the American Opportunity Credit (AOC) you can get money back with credits even if you don’t owe any tax. If you’re still in school, you may be able to claim the AOC (now permanent) for qualified expenses (generally, tuition and fees): the maximum credit is $2,500 per eligible student and up to 40% may be refundable. The earned income tax credit (EITC) is a benefit for working people with low to moderate income. Despite popular opinion, having kids isn’t a prerequisite but it does increase the benefit: you can claim a credit of up to $503 with no qualifying children and up to $6,269 with three or more qualifying children (click here for more on EITC rates and limits for 2016).
Take certain deductions like the IRA deduction and student loan interest deduction. To take advantage of most deductions, you should itemize – and most taxpayers (2/3) don’t itemize. But all is not lost. The IRS still allows for certain deductions (called adjustments to income) that you don’t have to itemize to claim: that handful of deductions can be found at the bottom of the front page of your form 1040. Among the most popular? The student loan interest deduction, the IRA deduction and the moving expenses deduction.
Self-employed needs to make estimated payments. Our tax system is considered “pay as you go.” If you’re employed, your employer will withhold taxes from your paycheck and turn those over to the Internal Revenue Service (IRS) for you as you get paid: at the end of the year, you’ll either owe more, break even or be owed a refund, depending on your financial situation. But what if you don’t have an employer or you get paid without having federal income taxes withheld? The IRS expects you to do the work and pay up if you expect to owe more than $1,000 at tax time. This applies not only to the self-employed (including freelancers) but also to landlords, S corporation shareholders, partners in a partnership and taxpayers with significant investments – almost anyone that gets a form 1099. To make estimated payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly. If you skip a payment or pay late, you may be subject to a penalty.
Mandatory file Tax return even if can’t pay Tax payment. Penalties apply for failure to file a return and failure to pay your tax. To reduce the hit to your wallet from penalties, be sure to file your return even if you’re going to owe and you can’t pay up. Options are available, including payment by credit card and a payment plan with IRS, if you can’t pay your entire tax bill by Tax Day.
Due dates very important. If you don’t file and pay by your due dates, you can get penalties and interest, which can add up quickly. The IRS has due dates: there are limits on how much time can pass before the IRS may no longer assess and collect on federal income taxes, sometimes called the statute of limitations. Here’s the kicker: if you don’t file your return, there is no statute of limitations. That means that the IRS can generally assess and collect at any time. To avoid that result, file your return as soon as possible – even if it’s past the due date. If you need to request an extension, you can do so right up to the due date.